A typical building contract outlines the agreement between the parties, including timelines, payment schedules, and ways to end the contract. Often, one party will send a “Notice of Intention to Terminate” to the other party if there has been a serious breach. This notice gives the other party a chance to fix the breach within a certain timeframe. If the problem is not addressed or the response is unsatisfactory, the contract may be terminated.

Important Note: Wrongfully terminating a contract can have serious legal consequences, so it is crucial to get legal advice to confirm whether you have valid grounds for termination. Even if the grounds are lawful, failing to follow the correct contractual procedure might still lead to a claim for wrongful termination.

Common issues like delays or cost overruns are often reasons for issuing a Notice of Intention to Terminate. However, in some cases, an owner may terminate a contract with just one notice under Section 41 of the Domestic Building Contracts Act 1995 (Vic) (the Act). This can apply in situations such as:

• The contract price increasing by 15% or more since it was signed.
• The contract not being completed within 1.5 times the agreed period.
• The delay or cost increase was due to unforeseen circumstances that the builder could not have anticipated when the contract was made.

To end the contract under Section 41 of the Act, the owner must provide a signed notice to the builder explaining the reason for termination.

What Can Be Claimed After Termination?

Payment disputes are common in construction when a contract is terminated. The builder may claim payment for any unpaid work, while the owner might seek damages for delays or defects in the work. After termination, a builder is entitled to be paid for the work completed up to that point. This is known as quantum meruit, meaning “as much as they have earned.”

In the case of Mann v Paterson Constructions Pty Ltd [2019] HCA 32[5], the Court clarified that a builder may claim under quantum meruit but cannot recover more than the contract price for the work done. The decision limits how much builders can claim when a contract is terminated and ensures the agreed pricing mechanisms in the contract are not undermined.

Section 38 of the Act also requires a proper paper trail for variations to plans and specifications that affect the price. The Court found that under this section, builders could not claim for unpaid variations, even if the owner had repudiated the contract (this may not always be the case though).

Difference Between Termination Under Section 41 of the Act and Contractual Termination

As outlined in Section 41(7) of the Act, Section 39 of the Act does not apply to terminations under Section 41. While this is similar to the ruling in Mann v Patterson, Section 41 applies specifically to time or cost overruns due to unforeseen circumstances. It is often described as a “no-fault” provision, meaning the owner may not be able to claim additional costs that could be recovered through a standard contractual termination.

This can include extra costs for hiring another builder, increased insurance costs, or other expenses that result from the builder’s faults in a standard termination.

Delays and Contributing Factors

In Mardell Constructions Pty Ltd v Singha [2009] VCAT 1532 [8], the Tribunal showed that Section 41 of the Act does not operate independently of the contract. In that case, the contract allowed the builder 10 days to fix a substantial breach before termination. However, the owner had also contributed to the delay by withholding payment, which led the builder to suspend work. The Tribunal found the owner wrongfully terminated the contract, leading to its repudiation.

Section 41(5) entitles the builder to a fair price for the work done up until termination. However, the builder cannot claim more than they would have under the original contract.

Reasonable Costs and Recent Discussions

Recent discussions about the meaning of “reasonable costs” have been highlighted in the 2024 Victorian Department of Government Services Review of the Domestic Building Contracts Act 1995. The review suggests expanding the definition of “reasonable price” under Section 41 of the Act and recommends a monthly payment model based on completion estimates from an independent contract administrator, such as an architect.

Determining a total settlement under Section 41 of the Act can be complicated due to varying opinions on the value of defects or variations. 

Damages for Defective Work

In Wenli Shao v AG Advanced Construction Pty Ltd [2019] VSCA 93[11], the Court addressed whether termination under Section 41 of the Act cancels out claims for damages due to defective work. The ruling stated that the cost of fixing defects must be considered when calculating the reasonable price owed to the builder under Section 41(5). In this case, the owner terminated the contract and sought damages for defects through VCAT.

The court ruled that the builder was entitled to a reasonable price for the completed work, but this amount was reduced by the cost to fix the defects. On appeal, the Supreme Court agreed that the builder could not be penalized twice for the same defects.

Conclusion

Section 41 terminations may seem attractive in the current environment of fluctuating material costs and availability issues, but they can reduce the amount an owner can claim due to the “no-fault” element. Owners should carefully consider other contract termination options before making a decision and seek professional advice to ensure they can maximize their claim so far as they are by law entitled to. 

Disclaimer:
The information provided in this article is for general informational purposes only. It does not constitute legal advice. For specific legal advice related to building regulations and compliance, please consult a qualified construction lawyer.